Delphi Digital: Common arguments against veToken and possible ways to improve veToken

The main points:

  1. veToken economics encourage liquidity providers to become long-term stakeholders of the DEX protocol. This is achieved by giving more incentives and governance rights to those who lock up the base token.
  2. Curve and Convex have created a powerful flywheel, allowing token prices and TVL to soar in the second half of 2021. This hyped the veToken model and brought supporters and critics alike. This paper wishes to examine these criticisms in detail.
  3. We developed an alternative veToken model approach using our knowledge of the Curve/Convex relationship extensively. This alternative is to account for a hypothetical token, which will be discussed in this article, through a program called “GOV”.
  4. The purpose of our proposal is to reduce centralization while still maximizing the core properties of veTokens: rewarding the longest and most dedicated participants, and not eliminating those contributors who cannot afford the liquidity risks in the traditional veToken economy.

Curve and veToken Economics

The rise of cryptocurrencies and tokenization has opened up the design space of protocol economics, allowing projects to inspire specific behaviors. However, many DeFi protocols reward all token holders equally, regardless of the value they add to the project. More often, this requires very little lock-up in exchange for governance rights and protocol benefits. We believe that the best design is to dilute employment capital and speculators, while rewarding long-term oriented participants.

One model we think encourages this behavior is through the implementation of voting escrow introduced by Curve. This model allows CRV holders to lock their tokens in a voting escrow CRV (veCRV) for a maximum period of 4 years. The longer users lock their CRV, the more veCRV they receive. As a way to take liquidity risk and eliminate the exchange of CRV supply (indicating their long-term commitment to the platform), veCRV holders are entitled to 3 key benefits:

  1. Prorated based on Curve fees incurred.
  2. Increased CRV rewards for liquidity supply positions (up to 2.5x).
  3. Governance and measurement of weighted voting power. Importantly, the measurement weight determines the distribution of Curve in future versions.

The above-mentioned series of incentives has had a positive effect. The more you target long-term users (measured by their veCRV), the more rewards you will receive. This flywheel is one of the most important drivers of the veToken model, which we will discuss in detail in the next section.

Curve Our long-term value proposition is to be the most stable asset for trading, and the most liquid venue for trading in the deepest way possible. The goal is not necessarily to be the main source of daily exchange of DEXs, but to empower stablecoin projects to build large liquidity reserves. This means that their primary users on the supply side are liquidity providers.

Many failed income farming schemes were destroyed due to unsustainable token issuance and the proliferation of employment capital. Here is an example of what veToken economics aims to avoid:

The initial liquidity mining program is launched, then employs capital to deposit large sums of funds with the sole purpose of mining, and then sells the rewards.

  1. At first, there will be a reflex rise. As TVL and the “hype” surrounding the project increase, so will the token price. This can further increase the yield on deposits, as the yield is paid in the native token, and the cycle goes on and on.
  2. Eventually, an inflection point is reached where token incentives begin to diminish, and at the same time, hired capital continues to sell their mined tokens. This sell-off resulted in lower yields for liquidity providers as token issuance declined.
  3. Finally, the reflex downswing cycle kicks in as liquidity exits the DEX making it fundamentally worthless. Lower liquidity means that DEXs cannot support as much trading volume, which will lead to lower costs. This has led to further depreciation of fundamentals and a drop in native token prices, further reducing LP’s yield.

Delphi Digital: Common arguments against veToken and possible ways to improve veToken

The veToken model avoids this by aligning liquidity providers with the long-term interests of the protocol.

In order for Curve Liquidity providers to receive 2.5x their rewards, they must hold a certain amount of veCRV corresponding to their liquidity. Not selling tokens motivated LP We:

  1. Buy… CRV on the open market and lock.
  2. Lock in all or part of the CRV liquidity incentives they earn.

It also encourages Curve liquidity providers on the platform to become long-term stakeholders and supporters of Curve’s success — rather than adopting a mining and selling strategy.

Furthermore, this not only motivates LP We’s 2.5x growth reward to lock, but also encourages them to accumulate as much veCRV as possible. This is because veCRV sets a weight that allows holders to direct the release of tokens to pools where they have funds (adding veCRV = more impact on token releases).

We have seen the accumulation of CRVs not only between large LPs but also at the protocol level Convex. The protocol is to use Convex to hold a large amount of veCRV and accumulate CVX to stimulate their capital pool and ensure long-term liquidity.

Through the combination of a slender distribution plan of CRV (over 300 years, release… 15% per year) and veToken economics, it has been able to incentivize a very sticky group of liquidity providers and token holders. This can be illustrated by the lock time between stkAAVE, xSUSHI and veCRV /Holdings.

Delphi Digital: Common arguments against veToken and possible ways to improve veToken

In addition to economics, veCRV also provides time-weighted governance rights to lock, which also fine-tunes incentives (whoever has been locked the longest has the most influence on governance). This part will be described in detail later.

Market reaction: The essence of liquidity is collateral and derivatives Convex

Given the apparent disadvantage of veCRV, its enormous utility and its lack of liquidity, the market has passed the Convex Respond. Convex offers a non-redeemable, highly liquid veCRV collateralized derivative known as “cvxCRV”. If holders want to maintain liquidity, there is no way for them to take ordinary CRV, because all governance rights and fees belong to veCRV. Convex takes advantage of this, allowing users to keep their CRV locked in Convex in exchange for cvxCRV. cvxCRV is a highly liquid, high-yield token that derives its revenue from the underlying veCRV cost, Convex cost, and the CVX Release platform the cost of.

In exchange for offering high yielding liquidity tokens, Convex Base veCRV provides all power, governance and measurement weights for the platform and CVX holders.

Convex Our basic product allows Curve LPs to stake their LP tokens on the platform, depositors can earn a higher yield (2.5x height), in return, Convex collects a percentage of the mining cost of CRV (10%), which is then paid to cvxCRV holder. In addition, 5% of the CRV mined by Convex is used with cvxCRV in the form of CVX Pledgor. This forms the flywheel in the picture below.

Delphi Digital: Common arguments against veToken and possible ways to improve veToken

Convex also gives CVX holders access to the underlying veCRV governance and measurement weights. CVX holders can vote on governance and receive incentives provided by third-party systems that direct them to vote for specific weight releases (also known as “buying tickets,” “voting rewards,” “bribes,” etc.). If you want to learn more about the Curve/Convex relationship, see our previous article.

Looking at 2021, the overall indicators of Convex Yes Curve TVL and token prices have played an undeniably positive role. But the liquidity of Convex derivatives, so important to CRV, created a huge supply shock as users rushed to hand over their tokens to the Convex platform, which locked them in perpetuity.

Delphi Digital: Common arguments against veToken and possible ways to improve veToken

Alternatives to veToken Economics

The remainder of this report will discuss implications for veTokens: a common economic criticism, and how to address them with an alternative implementation. For simplicity, we will use a hypothetical token called GOV to illustrate.

This hypothetical GOV token will have the following main design features, each of which will be drawn from Curve’s experience of playing an incentive-adjusting role, and at the same time, it will hopefully avoid a single, dominant, Convex Proxy-like voting system.

  • It will use three token structures combined with Curve and Sushiswap-like governance features:
  1. GOV stands for basic governance token and is not staked, similar to CRV. It offers no voting rights and no smart contract system fees.
  2. xGOV obtains transferable governance tokens by staking GOV, similar to xSUSHI.xGOV provides mobile GOV risk, and is entitled to a certain percentage of smart contract system fees and governance power.
  3. vxGOV refers to non-transferable governance tokens obtained by locking GOV, similar to veCRV.vxGOV is entitled to a larger proportion of smart contract system costs and governance rights.
  • It would avoid the need for proxy voting systems (like those of Convex entities) to be governed by a “whitelist”.
  • It will allow long-term collateralized positions (vxGOV) to terminate early and be penalized. (i.e. it will allow “exit” from the DAO in the protocol).
  • It will provide a voting incentive (also known as “bribe”) mechanism within the protocol.

We will discuss these three token GOV models, showing how it works through our understanding of Curve/Convex Criticism, including comments from Monetsupply and Hasu Yes MakerDAO on forms of governance.

1. Reduced investor base due to long-term lock-in

One of my arguments against veTokens is that long-term lock-ups make it difficult for entities such as index funds and trust products to incorporate these tokens into their products, reducing the potential for the protocol’s “governance foundation”. While arguably this may reduce the participation of some entities, we believe this is a case of quality over quantity. The primary use of trust and index products is speculation. In terms of governance, these entities will be indifferent stakeholders with no incremental value.

In our opinion, it is better for a community to have a small number of highly active stakeholders than a large number of passive and uninterested stakeholders. The whole point of veToken economics is to unleash the power of governance from short-term thinkers to long-term oriented participants.

Another way of saying that, “during the transition of ownership, when large holders stop relocking tokens ready to sell, the security of governance will be greatly reduced”. However, this argument is based on the assumption that no other governance actor will fill the void. Furthermore, the framework for a “governance takeover” does not appear to be accurate. Those who “take over”, because they lock up their veCRV holdings, are the biggest stakeholders in the game and thus naturally incentivize them to make positive changes to the protocol.

Our position is that by directing governance rights to the parties that invest the most on the platform, the incentives far outweigh the disadvantages of excluding speculative entities from governance. Additionally, it is a healthy move to move governance from large stakeholders who want to stop migrating tokens to new stakeholders filling the void.

Furthermore, we believe that the GOV model guarantees equivalence by providing liquidity within the protocol, and xGOV greatly alleviates this problem.

vxGOV (veCRV version of the model) is designed to be most attractive to liquidity providers and long-term oriented investors, which makes sense as vxGOV holders are the most important stakeholders in the ecosystem.

On the other hand, this does not mean that other participants cannot bring value and should be excluded from participation. And that’s exactly what xGOV does.

xGOV is a pledged GOV position, which is liquid. It can share the costs incurred by the smart contract system while gaining governance capabilities. This allows potential value-added stakeholders to continue to participate and contribute to the associated ecosystem, with the long-term and most dedicated participants holding vxGOV retaining most of the power and fees. The exact cost allocation between the two, and the resulting APR, will depend on many factors. But vxGOV will enjoy more benefits than xGOV.

We believe that an xGOV-style token can help bridge the gap and attract a group of people who are good for the project without the long-term commitment to illiquidity risk posed by veCRV Open Interest (vxGOV).

2. Collateral Derivatives

Another common argument against veTokens is that the resulting liquidity is collateralized derivatives. These pledged derivatives allow token holders to forgo governance in exchange for soft-related fees and liquidity gains in the short and medium term. This in turn has two potential negative effects:

  1. The fragility of the “soft hook”.
  2. It is possible to produce a dominant “proxy voter” holding a large percentage of governance, especially if there is a whitelist.

Delphi Digital: Common arguments against veToken and possible ways to improve veToken

Having studied the Curve/Convex relationship before, around the sustainability of Convex, our main focus is the vulnerability of liquid collateralized derivatives tied to the underlying governance token.

The “pegged” between cvxCRV/CRV aims to maintain the liquidity of the Curve stablecoin exchange pool through mining incentives. This pool facilitates low slippage trading between the two assets within a tight range. If you want to understand how these pools differ from traditional X*Y=K AMMs, we recommend reading the Curve stablecoin pool paper. To illustrate this, let’s dig into some data.

At the time of writing this report, Curve’s funding pool consists of 17.43 million CRVs (29.76% of the funding pool) and 41.13 million cvxCRVs (70.24% of the funding pool). Despite this imbalance, cvxCRV remains at a CRV discount of only 2% in the 1 million CRV deal.

Delphi Digital: Common arguments against veToken and possible ways to improve veToken

It is worth noting that of the 1.88 billion cvxCRV in circulation, only about 4.1 billion are in this stablecoin exchange pool, and the majority (~76.87%) of this is staked for protocol rewards.

If there is no way for everyone to redeem the base CRV with cvxCRV, we believe this soft link will continue to deteriorate over time. This will inhibit new CRV locks, as it is cheaper for users to buy cvxCRV using Curve Pool than to convert 1:1 on the Convex platform.

While this is a structural issue, let’s see what Convex can do to help strengthen the hook.

  1. Currently, Convex returns 10% of all CRV mining rewards to the cvxCRV pledgor. This ratio can be increased up to 15%. This will increase the revenue generated by these mining rewards for CVX.
  2. Convex DAO Protocols can use part of the veCRV holdings, remaining in the cvxCRV/CRV pool is a measure of sustainable voting weight to incentivize LPs.
  3. Fees flowing into the protocol treasury are currently set to 0%. This can be raised to a hardcoded 2% limit and used to buy cvxCRV, Help hook.

While hooks are key, we think we must consider its earning power when reviewing cvxCRV. Even if the peg may break, cvxCRV still has value if it can continue to offer attractive yields.

3. Governance Centralization

Regarding centralization of governance, we agree that it is unhealthy for one protocol to control more than 50% of governance. However, we consider it to be Curve/Convex in a special case, not the economic situation of veToken as a whole. And the novelty of Convex when it was first launched and its impact on the Curve whitelist, Convex can occupy more than 50% of veCRV. Without first-mover advantage and the ability to block competition through whitelisting, Convex will have stiff competition from the start. After some time, we urge protocols that intend to adopt veToken economics to launch without a whitelist. This will facilitate competition among several similar Convex protocols and maximize decentralization.

In addition to centralizing voting power by owning veCRV, the current Convex architecture relies heavily on multiple identities of administrators to convert vlCVX votes into Curve DAO proposals and weigh weights. This poses another important issue of centralization, as 3/5 multisig can effectively control over 50% of veCRV voting power.

In conclusion, we would like to highlight some recommendations that can reduce the risks associated with centralization of governance as it relates to Curve/Convex.

Partial votes:

Before partial voting, if 51% of vlCVX votes in favor of a proposal, then all controlled veCRVs of that Convex will vote in favor of Curve DAO China. In this case, after implementing partial voting, only 51% of the veCRV controlled by the protocol would vote yes, and the other 49% would vote no.

Incentive adjustment:

Much of the success of Convex depends on Curve. One way to value CVX is to calculate the present value of all future bribes that CVX releases from its impact on CRV. Given that Convex is Curve’s dependency and the CRV token price, it seems unlikely that Convex stakeholders will act maliciously against Curve.

So far, the relationship between Curve and Convex has been mostly symbiotic. This can be extended to other protocols participating in the “Battle of Curve”, such as Frax, Terra, Redacted, Olympus, etc. are actively accumulating more CVX protocols. The veToken model and its impact on future CRV releases have been combined with the top full space level Agreement, jointly accumulate CRV/CVX, and further adjust the incentive mechanism.

Minimum trust proxy voting:

Easier said than done (especially when combined with partial voting), but building future versions of Convex or equivalent, teams should consider building the system in a way that minimizes trust. For example: veCRV would preferably transfer the underlying governance rights to… no trust required via a smart contract vlCVX equivalent.

4. Bribes and short-term incentives

Bribery has been making waves in the DeFi space as a way to manage monetization — more precisely, to steer future token issuances. Refer to a snippet from the MakerDAO forum. “As long as the bribes paid (Bribespaid /CRV Reward) are higher than the CRV locked percentage, veCRV holders can still get the benefits by diluting the unlocking holders.”

One of our counterarguments to this argument is that when it comes to accepting bribes in exchange for weighted votes, token dilution occurs whether you accept the bribe or not. In our opinion, the naming of the word “bribe” here is a bit lame.

Jokes are jokes, people seem to have a knee-jerk negative reaction to bribes when we don’t think they should. In the real world, bribery is known as “lobbying” and is a multi-billion dollar industry. At least in Web3, it appears that the “lobbies” tend to be transparent, as most of this happens on-chain. Also, it is important to note that these “way to encourage voting” will appear with or without the veToken economy. We are already Bribe Protocol and Aave, I am. We expect this trend to continue.

5. veToken Economics increases the cost of defending against governance attacks

To attack through the governance veToken system, an attacker must purchase and lock up their voting rights. This greatly increases the cost of the attack, as purchased tokens cannot be recovered and sold. This is the basis behind the veToken economic incentives.

However, veToken economics critics see this as a double-edged sword, as it also increases the cost of defending against attacks. For example, if an attacker decides to buy and lock enough vxGOV to gain 51% of the voting power, the defender will have to re-lock vxGOV or buy more GOV to increase its voting power against malicious proposals.

We find this argument rather weak because it goes both ways. Considering the attack, economic protocols adopting veTokens require purchase and lock-up to maximize impact, which we consider to be a net positive.

Providing significant governance rights for lockups prevents attackers from borrowing the protocol’s governance tokens and malicious voting. In this case, the attacker can only be affected by the interest on borrowing, not the long-term adverse effects of bad decisions. This is an old example of an attacker trying to influence the governance of… MakerDAO with a flash loan. While this is an extreme case facilitated by flash loans, this still allows attackers to borrow tokens and vote for malicious proposals without significant price risk.

We believe veToken economics are one of the best defenses against this type of attack – even if governance is focused on Convex or type of protocol, since vlCVX holders are locked for 16 weeks, they will suffer the consequences of compromising Curve.

Learn to make GOV models from Curve/Convex

We develop our hypothetical GOV model using the experience of extensive research on the Curve/Convex relationship.

Every change to an existing model could derail such a successful flywheel as Curve/Convex stays 2021. We believe the following measures of a hypothetical GOV system would maintain veToken’s flywheel while also greatly alleviating some of the concerns in the previous section:

1. No whitelist

Convex at Curve I have > 50% One of the main reasons for the lack of governance is lack of competition. While Convex our design is the first of its kind, it has the opportunity to accumulate a lot…before any competitor discovers veCRV. At this point, it’s too late for other competitors, because Convex can use veCRV to control the Curve whitelist, basically preventing further competition.

Now the market has realized the pattern of Convex. Therefore, new projects should announce the transition to the veToken model with a fairly long lead time. This has many market participants preparing for its launch. As a result of competition from the start, we believe this will encourage two things:

  1. Make the governance distribution ratio curve fairer, as many projects have the opportunity to accumulate base GOV Tokens. This makes it very unlikely that a single entity will accumulate > 50% governance.
  2. In addition, each project can be encouraged to pay attention to the linkage of liquid pledge tokens, and the projects that can best maintain the linkage will continue to accumulate in the future GOV. While Convex’s cvxCRV has held up fairly well so far, we firmly believe that the more competition, the better.

2. Rage Quit

We believe that the appeal behind cvxCRV is not only its high APR, but more importantly its liquidity. Therefore, we have come up with a few different ways to maintain the benefits of the veToken Design, while still providing depositors with potential liquidity when needed.

The first option is to make vxGOV your position into a transferable NFT (like Solidly). While this makes it less attractive for you to drop GOV Token for a similar Convex protocol, pricing these NFT positions will be difficult. We can also assume that sellers will be willing to discount these positions on the secondary market, which may make locking up GOV tokens less attractive.

If vxGOV positions can be bought at any time, it would be a fair question to potential GOV buyers, “Why lock GOV if I can buy NFTs directly at a discount?” With this in mind, we think another better option is to introduce the ability to anger exit vxGOV targeting and impose heavy penalties on those who exit. The project can implement various strategies, here are some hypotheses to give us potential ideas for vxGOV to achieve anger exit:

If you lock up as much vxGOV as possible and want to withdraw, you will get 50% of your GOV tokens and the other 50% will be distributed back to the community. The penalty for an angry exit will decrease as your lockout time decreases. The benefits of an angry quitter can be distributed in a few different ways.

  • Diamond Hand: Collected GOV is re-locked to the maximum extent and is prorated according to each account control vxGOV. The benefit of this is to incentivize “Diamond Hands” and long-term commitment to the protocol, as these rewards will benefit the stakeholders who have invested the most in the protocol.
  • Treasury: This program requires some active financial management. For example, the funds could be used to buy similar stakes in other Convex or Redacted Cartel A, or to build a less related pool of assets.
  • The protocol is liquid: as an extension of #2, in Treasury GOV can be regularly deployed to the liquidity pool of GOV tokens. This will help build a strong liquidity base for GOV, and “protocol has” liquidity, will increase the sustainability of GOV in the long run.

We believe that parameters such as penalty ratio and GOV allocation will initially be dynamic, depending on protocol priorities. However, we believe that the effect of punishment should always be significant to ensure that governance rights belong to the parties with the most vested interests in the protocol.

3. Built-in bribery

We believe that built-in bribes may increase the attractiveness of staking vxGOV alone, rather than forgoing Convex etc., especially for small investors.

Taking Curve as an example, before the emergence of platforms like, it was difficult for holders of small veCRV to directly measure the release ability of Monetize.

If there is no market, bribery must be done privately through OTC. This sucks for three reasons:

  • About the DAO Come on, it makes more sense to contact a single veCRV whale than 1000s of smaller holders. This is good for whales, not small users – thus, not great.
  • Since these contacts typically do not occur on-chain, there is some counterparty risk. If the DAO bribes ahead of time, the veCRV whales may not keep their promise and vote for the agreed standard. On the other hand, if the veCRV Whales vote before receiving payment, the DAO may fail to deliver on its promise to pay.
  • Off-chain bribery happens behind the scenes and prices are opaque, resulting in an inefficient pricing market. Having a marketplace on-chain promotes a healthier marketplace for all participants.

With higher native vxGOV yields, we think liquid derivatives will become unattractive. This encourages separate staking, increases decentralization, and creates more competition for liquid derivatives.


Our results show that Curve, created by veToken Economics (thanks to Michael Egorov and team), remains one of the best incentive adjustment mechanisms to date. It is hoped that our analysis and suggestions can inspire the implementation of the veToken model project. Our core goal here is to reduce centralization while still maximizing the core attributes of veToken: rewarding the longest and most dedicated participants, at the same time, it does not rule out that we cannot afford the illiquidity brought about by the contributor economics of traditional veTokens sexual risk.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

Like (0)
Donate Buy me a coffee Buy me a coffee
Previous 2022-05-01 11:23
Next 2022-05-01 11:25

Related articles